Avoiding Mandatory Arbitration: An Important Pleading Tip for Attorneys

Avoiding Mandatory Arbitration: Be Careful in Drafting Your Complaint

By Dale G. Larrimore, Esquire

Larrimore & Farnish, LLP

Two recent federal court decisions highlight the importance of careful drafting of your pleadings in any case where a mandatory arbitration provision may be controlling. In Sanford v. Bracewell & Guiliani, LLP[i], the plaintiffs filed a claim against the defendant law firm, asserting claims for professional malpractice and breach of contract. Defendant filed a motion to stay the action, pending arbitration. Judge Slomsky, in the US District Court for the Eastern District of Pennsylvania, granted the motion with respect to the husband, but denied it with respect to the wife plaintiff. On appeal, the Third Circuit, in a non-precedential opinion, reversed and held that the wife was equitably stopped from asserting that she was not bound by the engagement agreement’s arbitration provision.

Although the Engagement Agreement identified only the husband as the client, the complaint filed by both plaintiffs alleged that “the Sanfords entered into an attorney-client relationship by way of the Engagement Agreement.” The Third Circuit opinion recognizes that arbitration is strictly a matter of contract and in deciding whether a party may be compelled to arbitrate under the Federal Arbitration Act (“FAA”)[ii] the court must consider whether there is a valid agreement to arbitrate between the parties and whether the dispute in question falls within the scope of this agreement. Here, the wife plaintiff sued for breach of the written Engagement Agreement, which included an arbitration clause. Even though she did not sign the Engagement Agreement, she is bound by the clause under equitable estoppels principles.  Under Pennsylvania law, a non-signatory may be bound by an arbitration clause when “the non-signatory knowingly exploits the agreement despite having never signed the agreement.”[iii] Such exploitation occurs when a non-signatory embraces a contract by seeking to enforce the terms of the contract or asserts claims based on the contract’s other provisions.  Principles of equitable estoppels mandate the arbitration of her claims.

Earlier this year, in Noye v. Johnson & Johnson, et al.,[iv] Judge Kane, in the US District Court for the Middle District of Pennsylvania, the plaintiff (who had applied for employment with Johnson & Johnson) asserted claims that the defendants violated the Fair Credit Reporting Act, on behalf of himself and putative class members. Defendant Kelly filed a motion to compel arbitration, arguing that plaintiff had signed a binding agreement to arbitrate all disputes relating to his employment.

Judge Kane denied the defendant’s motion to compel arbitration in an opinion that pointed out that plaintiff’s complaint makes no explicit reference to an arbitration agreement and that plaintiff attached no exhibits to the complaint.  Defendant attached the agreement to its motion to compel, but plaintiff argued that the complaint does not reference any agreement containing a mandatory arbitration provision. Plaintiff submitted an affidavit in support of his opposition to arbitration, declaring that while he signed numerous documents provided by defendant Kelly with his handwritten signature, the Arbitration Agreement contained only a “typewritten version” of his name. Plaintiff also submitted a copy of an employment agreement providing for non-binding ADR methods.” Upon consideration of the motion and response, and relying on Guidotti v. Legal Helpers Debt Resolution[v], Judge Kane denied the defendant’s motion to compel arbitration, holding that the parties are entitled to discovery on the question of arbitrability before the court would entertain further briefing on the question.

Note that the key difference between these two results was the complaints that were drafted by the plaintiffs. 

©Copyright 2016, Dale G. Larrimore, Esquire

First published October 2016 in The Verdict, Vol. 2016-2017, Issue 2, published by the Philadelphia Trial Lawyers Association, Philadelphia, PA.

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[i] Sanford v. Bracewell & Guiliani, LLP, 618 Fed.Appx. 114 (3^rd Cir. 2015).

[ii] 9 U.S.C.A. § 1, et seq.

[iii] Sanford, supra, 618 Fed.Appx. at 118.

[iv] Noye v. Johnson & Johnson and Kelly Services, Inc., 2016 WL 4678999 (2016).

[v] Guidotti v. Legal Helpers Debt Resolution, 716 F.3d 764 (3^rd Cir. 2013).